How to compete in Europe

INTEREST in the European Union’s competitiveness did not begin with the euro crisis. Safeguarding Europe’s advanced position in the world economy was, after all, a key motivation behind the creation of the single market. Since then, interest in EU competitiveness has risen further, spurred in particular by the challenge posed by countries like China.In order to ensure sustainable and inclusive economic growth in Europe, policymakers and the public must, above all, regard international trade as a mutually beneficial exchange of goods and services. Productivity growth and innovation are critical to reaping the benefits of this exchange, and, to ensure both, policies that cost European taxpayers nothing are at least as important as policies requiring public funds.The first step is to stop viewing international trade as a zero-sum game that costs some countries as much as it benefits others. Obviously, companies within the same industry are in direct competition with each other, and gains in market share by one tend to come at the expense of competitors. So it follows that the payroll and earnings of a company will rise if it outperforms its competitors.There are two problems with this approach. First, there is little evidence to support the view that industrial policies enlarge a country’s share in world trade. All too often, government interventions based on strategic-trade considerations simply provide cover for protecting domestic industries, which harms other countries – and ultimately the protectionist’s own economy.Second, and more important, analogizing companies to countries is deeply flawed. When a company becomes more competitive, it crowds out its rivals; they get nothing in return. But when a country becomes more productive and increases its exports, it acquires the means to import more, so other countries’ exports rise. Indeed, increasing imports is the ultimate reason for a country to boost its exports, whereas a company is motivated to outperform its competitors so that it never needs to buy anything from them.In recent decades, Europe has not moved vigorously enough on these fronts, but it is not too late to pick up the pace. Here, the services sector holds the greatest promise.Our everyday experience inclines us to regard innovation in terms of more sophisticated and/or higher-quality goods and production processes. And, indeed, manufacturing is arguably an important source of innovation and economic growth. But any agenda aimed at stimulating economic growth in Europe must include the services sector.Indeed, services account for about two-thirds of total value added in the EU economy. In employment terms, the services sector is larger still. Moreover, since the 1990’s, output growth in the EU has been primarily driven by expansion of services.At the same time, productivity growth in the EU’s services sector has been lagging behind developments in the United States (even given the possibility that pre-crisis productivity growth in US financial services was partly notional). This suggests that there remains untapped potential to boost innovation and productivity in Europe.In raising productivity in services, what economists call “intangible capital” becomes ever more important. Intangible capital results from investment in R&D, but it is also the result of investing in workers’ skills, organizational improvements, better processes, new designs, and so on.Countries whose services sectors have made a large contribution to productivity growth have invested significantly in intangible capital, pointing the way to success in boosting innovation. This is the route that the EU should follow.Philippe Maystadt is a former Minister for Economic Affairs, Minister of Finance, and Deputy Prime Minister of Belgium.Copyright Project-Syndicate.org